The Lack of Market Forces in U.S. Healthcare. MRI Cost and Utilization as an Example.

The fundamental problem with the economics of medical care in our country is that, in accordance with government policies over many decades, we've relegated payment to third parties. The result has been high prices, reduced quality of services and stifling of service innovation. I'd like to provide some concrete examples in the next few posts. I'll start by inserting a section from an essay I wrote 3 years ago:

In Japan medical services are completely private but prices and fees are strictly controlled by the government and are set very low. The average price for an MRI of the head in 2009 was set by the Japanese government at $105 as opposed to over $1000 in the U.S. At such prices one might have expected producers to have limited interest in these tests but in fact Japanese manufacturers responded to the market by producing compact machines at a much lower price[1] and are producing these machines for export.  As a result consumer demand increased markedly and Japan now has far more MRI machines and does far more MRI tests per capita than any other advanced country[2] resulting in both decreased cost and increased diagnostic capacity. Contrast this situation with that of Canada where funds for medical services are centrally controlled and availability of MRI machines is limited by budgetary constraints. One finds there long waiting periods for all but the most urgent MRI tests[3] and therefore marked decrease in diagnostic capacity.

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[1] Reid, T. R. (2010-08-31). The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care (pp. 92-93). Penguin Group. Kindle Edition.

[2] MRI scanners per capita http://www.oecd-ilibrary.org/sites/health_glance-2011-en/04/02/g4-02-01.html?contentType=/ns/StatisticalPublication,/ns/Chapter&containerItemId=/content/serial/19991312&itemId=/content/chapter/health_glance-2011-30-en&mimeType=text/html

[3] Waiting list for MRI in Canada http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2653696/#__sec7title

I quote this section not to endorse the Japanese system or to suggest the correct utilization of MRI scans but simply to show the large elasticity that exists in the use of medical  technology and how such technology is dependent on economic stimuli.

Many people have the idea that medical practice is cut and dried, that there is only one right way to treat each case, and that therefore the market forces of substitution or alternative choices cannot operate such as for example when buying a refrigerator or a television. This is far from true. If a patient comes with shoulder pain there are multiple diagnostic and treatment options. MRI gives the most definitive anatomical diagnosis but is not needed. After all there was a time when there was no MRI. A cost of $100 vs $1000 makes a great deal of difference as to whether it is selected.

In Japan almost all have insurance. There is a fee for service system and the patient pays a portion of the cost, usually 30%. All medical facilities must be operated by doctors. The government carries on negotiations with doctor representatives to set prices. I believe that it would be better to have a market based system in which the patient makes cost decisions which would result in lower prices and more innovation. However the point is that the price was forced down. Hitachi and Toshiba innovated by producing a new line of compact, inexpensive MRI machines costing around $150,000 - a fraction of the price of the bigger machines then used in the United States resulting in a much larger MRI market.

In our system the orthopedist demands an MRI which leaves no diagnostic ambivalence. The cost to the patient is either zero or some small co-pay. The third party payer has little justification to refuse. All it can do is put up roadblocks, demanding a lengthy frustrating procedure to obtain permission. Canada with it's government run system faced the high cost MRI problem by limiting the availability of MRI machines. MRI facilities in Canada have a substantial wait list problem, with some centers reporting wait times of up to one month for urgent scans and up to several years for non-urgent scans.

The U.S. has 4 times as many MRI scanners as Canada and Japan has many more than both countries. Japanese patients have many more MRI scans than in the U.S. and far more than in Canada. In the U.S. because of third party payment there is little market pressure on cost and technical innovation tends toward higher cost refinements rather than lower cost advances. Technology is the lifeblood of medical advances. However, for third party payers technology that increases cost is a liability and is resisted. The Canadian government payment system follows suit and therefore a system intended to assure medical care for all by putting the government in charge ends up by restricting its availability.

MRI is an essentially harmless way to investigate the body's anatomy. Originally it was developed with brain and spinal cord diagnosis in mind. However it has now revolutionized orthopedic diagnosis. I read recently that prostate MRI is equal to needle biopsy in localizing cancer. Who knows what other uses might be found  in a mass market, but it's use is restricted by payers. MRI price is obviously far higher than it needs to be, even for insurers. The real price would be discoverable only in the free market in which consumers rather than third parties paid. Direct payment would put market pressure on price, would not restrict the market but would expand it and would lead to innovation based on cost and efficiency just as it did in the computer market.

Policy differences in the Trump cabinet. How to speak about Muslim terrorists.

http://www.foxnews.com/politics/2017/02/25/trumps-national-security-adviser-reportedly-says-label-radical-islamic-terrorism-not-helpful.html

Multiple members of Trump's cabinet have expressed opinions which differ substantially from Trump's. For example Mattis on enhanced interrogation, and Tillerson (and others) on climate change. I could site many other examples. The news media generally has been reporting these conflicts as evidence of disarray bordering on incompetence. Most of us who support Trump see this tolerance of differing points of view as a highly positive quality. It indicates that Trump is choosing advisers based on what he feels are their capabilities and not based on their slavish alignment with his thinking.  (Of course no one thinks alike on all issues so that someone who appears to be doing so would be hiding his true opinions). I suspect that this has been his management style in his business as well, presumably a key to his success. It is also a good thing that differing points of view are allowed to be expressed openly, and not just in private. This stimulates open public discussion which is one of the strong keys to success in a democracy.

It seems to me that this was not a strong suit of the Obama administration, that is that one rarely heard any reports of internal disagreement. This was not to their advantage. For example there were these quiet reports that Hillary (and others) disagreed with the total Iraq pullout, which turned out to be disastrous. Her inability to stray from the party line and make this point during the campaign I think was to her great disadvantage.

My second comment is on the Islamist issue. I can see McMaster's point but I disagree with it. Of course the great majority of American Muslims who accept American values are fine people who are just interested in a good life for themselves and their families. On the other hand, although I have never read the Koran (English spelling) there is this thing they call Sharia law which seems to be fundamentally opposed to western ideas of individual freedom and equality. That these concepts are not just antique symbolism not to be taken literally, as in the Hebrew bible, is indicated by the strict adherence in some Muslim countries such as Saudi Arabia where women are subservient, there is no religious toleration and social deviancy is subject to severe punishment. Apparently this extreme interpretation of the Koran includes capital punishment for those who express derision for Mohammed or for apostates from their religion. There are a great many Muslims in the world and it is my understanding that there is a sizable portion, perhaps even the majority who favor these ideas, even if they do not themselves carry out radical behavior. So with these people there is a clash of civilizations. If they were to simply stay in their own territory and run their civilization as they wish that would be one thing, but some very small, but lethal, proportion are not content with that.

President Obama (and President Bush as well) adopted the policy of minimizing this conflict so as not to offend those Muslims who are content to accept western values and hopefully to recruit them to help in the battle. As it turns out I don't think this has been an effective strategy. In fact the reluctance to forthrightly name our enemy seems to many to have inhibited our response and led to more calamity. Trump's idea, and I and many others agree with it, is to point out that there are 2 kinds of Islam, the modern kind that adheres to the good aspects of Islamic teachings, that correspond to the principles of peace and toleration advocated by other religions, and the abhorrent, fundamentalist kind that teaches a violent intolerance of those who do not accept Mohammed's word as expressed in at least some parts of the Koran.

I think this debate, stimulated by the differing opinions in Trump's cabinet, might hopefully lead to something of a compromise in Trump's polemics. He should state loudly and clearly that our country is freely open to the adherents of all religions as long as they accept western values of freedom, tolerance and equality. (We went through this same debate on a smaller scale 55 years ago with Catholicism when Kennedy was elected.) But at the same time we will adamantly reject those who wish to come here who do not accept our values and wish to change us to their system, sometimes by violence. And he should call on the "good" Muslims to help us in this fight, more openly than they have up to this point, by strongly condemning the radicals and by helping us to identify and remove from our midst, or possibly even to reform, those who do not accept our values.

Where am I going wrong??

The Russians, our election and federal control of health care

The Democrats, and some Republicans who favor the status quo, have been in shock since the election. As a manifestation of this the amount of vitriol directed toward the new President and his many supporters is unprecedented. Also the losers have been intensively pushing the narrative that Russian interference with the election, in collusion with the new administration, is responsible. Of course the Russian government, as well as many others, have been spying and playing dirty tricks on us for years as we have in exchange. This is all public knowledge. Nevertheless until the election the Obama administration for the most part was accommodating to Russia and Putin. They tried the Russian reset. Early on they aborted the planned missile defenses in eastern Europe. Very little was done to prevent the takeover of the Crimea or the overture in the Ukraine. And famously President Obama assured Vladimir that he would be more flexible after the election. But it was the 2016 election result that irked President Obama into expelling Russian diplomats and imposing economic sanctions on some of its citizens.

But if the Russians truly favored Donald Trump and exposed the emails of John Podesta and the DNC to help him, it did not turn the election. The emails verified things that were already assumed to be true, namely that political parties and politicians tell their constituents what they want to hear but say and do the opposite in private. They confirmed the obvious fact that the major news media heavily favor the Democrats and do what they can to help their cause. But it was not the emails of John Podesta or the knowledge that their newspapers favored Mrs. Clinton that induced the good people of northeast Pennsylvania, who have a 3:1 Democrat registration preponderance, to vote to elect Mr. Trump. The election surprise was the culmination of the growing dissatisfaction in much of the citizenry with the direction in which our country has been heading and the blame was placed squarely on the progressively intrusive dysfunctional activities of the federal government.

The federal interference has been involving many areas of our lives, and about these I have my opinions as much as anyone else, but no real expertise. In the medical area I can speak with some authority since I have done a number of types of medical practice in my career and have watched the federal involvement almost since its beginning. Our government has for decades been collecting tax money to finance the medical care of a large mass of citizens who are well able to manage their own affairs and would be much better off doing so. At the same time it has often ignored or given short shrift to many needy persons who have suffered medical misfortune. The limited access, very high deductible solution of Obamacare has proved to be unworkable.

The Medicare program, the ultimate free lunch, incentivizes waste and abuse, spends far more per beneficiary than it takes in, and so despite steadily increasing tax levies over the years has been progressively adding to our national debt. In its desperate attempt to control this situation without major rationing of care, the government has imposed burdensome regulations. The federal government is at this point mandating for private medical practitioners what electronic equipment and software they must buy, what types of personnel they must hire, what specifically they must note in their records, what way they must prescribe their medications, and increasingly what types of tests they must perform and what medical guidelines they must follow in their treatments. Incident to this regulatory activity they are taking from patients what they value most, the time and undivided attention of their doctors.

Other federal programs are equally troublesome. Reimbursements for Medicaid patients are often only a fraction of the cost of their care, but at the same time the program is plagued by even more waste and abuse than Medicare. Recipients are routinely provided with excessively expensive treatments that cannot be afforded by those who are footing the tax bill to pay for them. Also the Veterans Administration program is a well-known bureaucratic nightmare and I have personally experienced it when I practiced for a while as a full time VA doctor.

Those who call for a federal government takeover to correct these problems are seriously misguided. Some quote the experience with such plans in other countries. I have studied these things but have no personal experience to report. However I can say with confidence from my experience that there could not be a worse solution for the political entity that is the United States of America.

Those responsible for federal policy on medical care in the Trump administration understand these problems and have good ideas on what to do about them. Nevertheless we have all gradually adjusted our lives to what we have and therefore it is going to be a very, very touchy task to move things to something more rational without causing at least temporary harm. I'll be watching closely and will continue to comment as things unfold.

Medical Prices - Why They Are So High

Let's evaluate medical prices by a concrete example. Recently I got a bill for $70 from a lab for a PSA test that I had done last year. This is a screening test for prostate cancer that I like to have done yearly. I had to get some other lab work done so it was convenient to do it when I did. Normally my Medicare coverage would pay the bill but Medicare approves this as an annual test and I happened to be one month early. I don't normally keep that close track of the exact dates of my tests. It's not important to me since the yearly timing for this test is really pretty arbitrary, but for the Medicare regulators it's not necessary at 11 months and 30 days, but is warranted at 12 months and 1 day.

I have access to the Medicare price list so I checked it out and found that Medicare would ordinarily pay the lab $25 for the test and at that price I can assure you that the lab is making a profit. I know that because for a few years I and three other doctors who shared office space had a small office lab and even with a low volume of tests it produced a small income with mostly Medicare payments.

Well where does the $70 charge come from? Medical providers base their charges on insurance reimbursements rather than on market forces of supply and demand. The charge is set to capture payment from the most generous insurers, as common sense would dictate. By law one cannot charge Medicare differently from other insurers but the difference is written off, as it is with other insurers with which the lab has a contract. Of course there is normally little impact on the recipient of the test for whom the charge is $0 unless there are copays and deductibles, but even then almost everyone is protected from the $70 charge by their payer's contract. The only ones who pay the full price are those with no insurance, or those like myself who were thoughtless enough to wish to suit their own convenience.

But wait, there's more. What would be the true market price of the test based on the lab's cost together with the best profit it could achieve in the face of its competition? Well that would only be discoverable in the actual market, but I tried to take an educated guess since I at least know about operating an office lab. Searching the lab supply web sites I found test kits for 100 PSA tests for $350, so $3.50 per test. Of course the lab has other costs and the biggest in any medical operation is personnel. My best guess is that the real market price that one would pay in the absence of insurance or Medicare would be in the range of half of the Medicare payment, $10-15. Keep in mind that some significant part of the lab's cost is involved in the billing process for Medicare and all the insurances. I can't say for sure for labs but for most medical offices this would be in the range of 5-10% of receipts.

I don't know the Medicare process for setting lab test reimbursements, but physician payments are governed by a 30 person committee composed of doctors from every specialty. As in any centrally controlled economic system, as intelligent and possibly as unself-interested as the members of this committee might be, there is no possible way for them to have the on the spot knowledge required to know what the market price should be. Furthermore by setting prices the system is foregoing competitive forces. When all competitors get the same payment there is less incentive to increase efficiency and productivity since doing so will not result in a gain of market share by lowering prices.

The bottom line is that medical prices are far higher than they should be because of our tendency to pay by insurance and yes, Bernie Sanders, because of Medicare. Furthermore since the person who pays the fiddler names the tune our system is paternalistic, requiring permission for everything, so that my test must be done at the convenience of Medicare and not my own. When politicians tell you that they are going to save money for Medicare by eliminating waste you should understand that Medicare by its structure is inherently wasteful. The true cost of that waste is the value of the alternative uses for which these resources could be used.

Thoughts on the Inauguration. Was the Speech Too Dark?

Lately I've tried to stay away from political posts which are causing a lot of inflammatory response from some of my friends. My thoughts about the inauguration are not particularly partisan so I thought I'd take a shot at it. I missed the actual ceremony because I was golfing (eat your heart out you northerners). But I did catch some of the commentary later and watched some of the parade.

The speech was criticized by Trump's detractors as painting too dark a picture of modern America. It was nice to see the high school and military bands parading down the street but the police lining the route shoulder to shoulder and the hoards of secret service men certainly do strike an ominous note about our present society.

Recently when driving out of Chicago from a visit to my son we accidentally took a wrong route and so had to get off the freeway and went briefly through the city streets on the fringes of south Chicago to get back on. I was beginning to get pretty nervous as to where my GPS was taking us and was pretty darn happy to get back on the highway. Yet we were nowhere near the really troubled area.

In the early 60's I was in north Phillie for med school. It was pretty run down then, a minority ghetto. Us newlyweds lived in an old building converted to married student housing right in the middle of it all and yet we walked the streets safely. This was the poverty against which Lyndon Johnson declared war. Today it's light years worse. I defy anyone reading this to drive through the streets of south Chicago or north Phillie, or any of the dozens of other big city ghettos in this country without locking your doors and getting out of the area as quickly as you can.

And how about general safety. I can still recall what it was like to just go to the airport and get on a plane without the long security lines -- before the modern insanity that we've come to accept as normal started. And when I was in 2nd and 3rd grade we used to walk several blocks unescorted except for the school patrols at the street corners. Later, in high school and college, I hitchhiked everywhere. Who would conceive of doing that these days.

Trump's speech was described by Chris Matthews as Hitlerian. I guess exaggerations like that are to be expected in political back and forth. The same comparison was being made of Barack Obama as he gave his rousing oratory before large throngs of cheering fans, although I don't recall it being said by a major news commentator. Obviously it's hyperbole, as anyone with even the most superficial knowledge of the content of Adolph Hitler's speeches or his writings in Mein Kampf should know. And yet yesterday we watched on TV as hundreds of "protestors" smashed large plate glass windows in full view of the cameras. In light of the Hitler comparison it's ironic that this event, so reminiscent of Kristallnacht, was carried out by the protestors rather than the supporters of Trump.

There is economic frustration in the country, especially in the Northeast and Mid-West areas. I surely see it when I'm driving around Scranton. I don't think they see it very well in the rich areas around Washington or along the coasts. The government has increased its safety net programs but they're not really a good substitute for the benefits of an expanding economy.

So is it too dark a picture, or is it reality? I guess in the next couple of years we'll see by comparison.  

Direct Primary Care and Health Savings Accounts

When I was teaching med students from the new medical school in Scranton a couple of years ago I used to tell them not to base their future practice decisions on the present situation in medical care. When I graduated in 1964 very few could have predicted the dismal state that medical practice would be in decades later. I have no doubt that these students will be in a much different environment 10 or 20 years down the road, and I predict it will be for the better.

There's much discussion these days on what should replace Obamacare. However interesting things are happening outside of the government arena which may be a harbinger of things to come.

Although primary care doctors are being chased out of the marketplace by low reimbursements, oppressive government regulations and the burdensome requirements of insurance companies there is a growing movement of what is being referred to as Direct Primary Care. These practices, which are springing up all over the country, are being developed by young doctors who still desire the great personal satisfaction of primary care practice that comes with maintaining longstanding relationships with patients and their families. The concept involves elimination of all insurance and government contracts, thereby dramatically reducing overhead and time wasted on complying with regulations, and then providing all primary care for a modest monthly fee in a much more patient friendly manner. Generally the stable income flow occasioned by direct patient payments permits the physician to place a limit on number of patients which in turn allows for unrestricted time with patients and rapid, often same day, appointments. Usually a large number of services are included such as injections, EKG's, some lab tests, etc. Often arrangements are made with specialists for reduced fees. The plan allows for innovation in modern means of communication, such as cell phone contacts, text messaging and even Skyping as needed with the doctor. Getting into such an arrangement is a scary decision for a young doctor with a family to support but there are pioneers out there with the courage to try it. For those interested here's a web site that discusses it more. http://www.dpcare.org/

This concept is of special interest to those with high deductible insurance, especially combined with a Health Savings Account who are seeking value. HSA's, often funded by employers, are the fastest growing health insurance plan in the country, with 18.2 million people using them in 2016, an increase of 25% from the previous year. This is occurring despite some headwind from the Obama administration. The Dems generally look askance at the idea because HSA's are more of a market based rather than a big government solution to medical care financing. Up to this point monthly payments for Direct Primary Care practices had been ineligible for HSA use because they were being considered insurance premiums, but a new bill is pending in congress changing this and there's little doubt that it will now pass. I was interested to speak with a Washington based friend of mine who is a lifelong Democrat and represents an exercise equipment firm. He is lobbying to make his company's products an HSA eligible expense for those undertaking an exercise program. Unlike health insurance the HSA concept is that funds can be used for any health related expense. I agreed with him that HSA's should include as broad a range of eligible items as possible.

These innovations are the thing of the future in medical care because they are so in line with good economics, controlling cost at the same time as increasing individual choice. They are some of the ways out of the absurd inflationary, rigid, bureaucratic system that we are in but have become so adjusted to over the years that we accept it as normal. But they are just the beginning. With the proper changes things could be so much better, but that discussion is a matter for another time.

Obamacare - How to Replace It

Obamacare repeal has become the subject of the day, and it should be repealed. But we should not lose sight of the fact that Obamacare is a small part of the problem and much more needs to be done. This misguided idea was actually an attempt to fix problems in the economics of our medical care that have been developing gradually because of government policies over the past 50 years. It was a government solution to a government caused problem.
The government in its tax policies since the end of WW2 encouraged full medical insurance paid by employers. That was well-intentioned and might have been OK in the 1950's with an entirely different kind of work force. Today expecting that everyone will get all their medical care through their employer doesn't work. Nowadays our economy is far more diverse. People change jobs frequently, or work for small employers or are self employed. Medical care is far more complex and variable and so requires the efficiency and adaptability of a true market.
And then since 1965 there's the big elephant in the room, Medicare (and it's little sister Medicaid) which has become the dominant force in shaping medical care. This program as I've been complaining incessantly has been a major factor in preventing price competition, in stifling of innovation, and in causing misalignment in services. In addition it is killing us financially. And its determined efforts to correct its problems by ever more bureaucratic regulation is becoming nightmarish and absurd.
President Obama and his supporters saw one small aspect of our problem, namely that those who are not covered by employer insurance, such as it is these days, or by one government program or another, are left out of the game. Their solution was to force everyone to play, and to make things even worse by mandating that insurances cover things that people don't need. Evidently, as smart as they are, they have their noses right up against one of the trees and don't see the forest.
The Republicans are touting repeal and replace. There is nervous tittering among the Democrats who think their opponents have a tiger by the tail and won't be able to come up with anything better. Their problem of course has been that they've always been unable to think out of the box of government control. There are some good plans out there, such as one recently proposed by Dr Rand Paul. Also Trump's new HHS Director Dr Tom Price and CMS Director Seema Verma understand the problems well and I think the Repubs will coalesce around a comprehensive plan.
So what do we really need? Here are the components:
First and foremost we need prices to come down. Across the board they're many times higher than they would be if they were based on market forces. Providers of medical goods and services base their prices on insurance reimbursements rather than on their costs and return on investment. Competition to lower prices is absent since everyone gets the same reimbursement from the payers and are paid only for things that are covered. Overhead costs to comply with regulation are going through the roof. Lower prices will be a boon for all medical consumers but especially for those with lower incomes.
A big way to accomplish lower prices is to reduce our dependence on insurance and third party payment. Insurance should be for big, unexpected items, not for everyday expenses. Everybody knows this. No one would buy homeowners insurance that covered blocked sink drains. Paying for ordinary items by insurance causes price inflation and decreases choice. But our problem is that we've got a system where someone else buys the insurance for us even though we're still paying the price through decreased wages. So then we have a high priced system which leads to demands for more insurance. And those who don't have insurance are really stuck paying ridiculously high prices that no one else has to pay. It's a vicious cycle.
So as far as insurance is concerned preferably we should buy our own and own it ourselves so it's ours no matter what job we have. But before that happens the insurance market has to have major revisions to bring the cost down such as Drs. Paul and Price are proposing. When we buy our own we'll want cheaper high deductible insurance and we'll demand that all the regulations on where we buy it and what needs to be covered be eliminated.
We need to get government out of the way except for people that need help. That's a problem for now because we're all adjusted to the present system. But if the government is going to divvy up tax money for medical care it ought to at least be distributed fairly and at present it isn't. This is a big part of the maldistribution in medical care in our country that Obamacare was supposed to address. And whatever subsidies are given should allow for the broadest possible choice of their use. These are all features of the present Repub plans so hopefully we will see some good changes. Personally I think start up government funding of Health Savings Accounts would be an interesting idea.